Watchdog group Public Citizen and a U.S. senator are calling for an investigation into Bank of Americas settlement with mortgage giant Fannie Mae in a dispute involving $1.4 trillion in loans.

The bank and Fannie Mae announced Monday that they had reached an accord that would have Bank of America pay $3.6 billion in cash and buy back $6.75 billion in loans from the mortgage giant. The two had been battling over a large pool of loans sold to Fannie by Countrywide Financial Corp. between 2000 and 2008. Bank of America purchased the subprime lender in 2008.

Once the loans started to go bad, Fannie sought to force Bank of America to buy them back, claiming Countrywide had misrepresented their quality.

The agreement released Bank of America from future claims on the loan pool, which carried an original principal amount of $1.4 trillion but had an unpaid balance of about $300 billion. The Federal Housing Finance Agency, which regulates Fannie Mae, said the deal was in the best interest of taxpayers. The government took Fannie and Freddie Mac under conservatorship during the financial crisis and has used federal money to cover losses.

Public Citizen says the price Bank of America paid was too cheap for the volume of loans involved, according to a letter the organization sent to the Office of Inspector General in the Federal Housing Finance Agency.

Terms of this deal demand careful scrutiny, the letter says. It asks the office to look into how the Federal Housing Finance Agency determined the agreement was best for the public.

We are in receipt and are reviewing it now, Federal Housing Finance Agency spokeswoman Kristine Belisle said. The office was unable to comment further.

U.S. Sen. Robert Menendez, a Democrat from New Jersey, also weighed in Thursday with the same concerns. His office said he would encourage an investigation into whether the agency looked into the decision rigorously enough.

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